How To Calculate Employee Turnover Rate Correctly

Managing employee turnover has become a costly exercise for Australian businesses. The Great Resignation is showing no signs of abating, with 9.5% of the Australian workforce changing their occupation since last year, almost the same as the preceding year.

Did you know that unemployment is at a 48-year low of 3.5%? We’re in a jobseekers’ market, and the power is presently in workers’ hands.

Where does your company sit?

If you aren’t measuring turnover rate, you do not have the full picture of your talent management strategy, as well as your reward and recognition and onboarding programs.

How To Avoid Mistakes When Calculating Turnover.

Before calculating the employee turnover rate, we need to establish a more important principle.

In other words, bad data leads to bad insights.

What’s the #1 cause of bad data?

Averages.

They have an astonishing capacity to lie and cloud your decisions. Yet averages are everywhere because they are:

What’s the better option?

Segmentation. Always identify employee segments you’d like to analyse, exclude segments that pollute the dataset (I’ll show you how to do this in a moment) and report on those, along with the overall averages.

You’ll gain the ability to put parts of your business under the microscope, identifying the best and worst performers:

Which Employee Segments To Include And Exclude?

Should you include internships in your employee turnover calculations?

No.

Doing so will obscure your data – since most internships are short-term contracts with no path to full-time employment.

The error will be particularly large if you employ a disproportionately high number of interns.

Employee groups that you also may want to exclude from your main turnover calculation are:

How To Decide On A Reporting Time Period.

Most companies report on their annual turnover rate as standard.

However, annual calculations may obscure seasonal trends (e.g., are staff waiting to receive a bonus at the end of the financial year before handing in their resignation) or Black Swan events (e.g., COVID).

To prevent this, report on both shorter and longer time periods. For example:

How Do You Calculate The Employee Turnover Rate?

Now that we’ve emphasised the importance of clean data, let’s look at calculation formulas.

You need two numbers:

Calculation:

Example:

Let’s say, your human resources department had:

Pretty simple, right? You don’t have to be a particle physicist to work that out. This next calculation is a little more complex. Stick with it, okay?

(Related: Best Payroll Software In Australia).

Alternative Formula For Employee Turnover Rate.

An alternative calculation is virtually the same, but you take an average of the number of employees during the period (i.e., Q1) rather than the number of employees at the beginning of the period.

Doing so captures any outliers and fluctuations in recruitment over the specified time, and the dynamic calculation is sometimes more accurate.

Sometimes.

In the above example, you had 150 employees at the beginning of the period (Q1). But the number of employees changed in that time.

The average number of employees during this period is 141.

This is calculated as: (150 + 140 + 135) / 3 = 141

Example:

Using the average number of employees, we can calculate the employee turnover rate like so:

By following the alternative formula, you end up with (20 / 141) x 100 = 14.1%

Why Is The Alternative Formula Problematic?

The main reason why the first turnover rate formula is better is because it distinguishes between existing employees and new hires.

The alternative formula includes new hires.

For instance, if the company in the example above had a major influx of new staff in Q1, the turnover rate would be reported differently.

Let’s assume that the company in the example above hired 80 new employees in January.

The average number of employees throughout Q1 is 195: (150 + 220 + 215) / 3

That would mean the final turnover percentage is: 10.2%

This is calculated as (20 / 195) x 100.

We don’t know whether the 10.2% employee turnover rate is heavily influenced by new recruits terminated during their probationary period.

What Is Considered A High Turnover Rate?

To help you gauge your employee turnover rate, keep in mind that the average is 10.6% across all industries.

However, there’s no magic number for determining what a good employee turnover rate is. What’s good for one company may not be for another, for the same reason that another company’s EBITDA could be perceived as good or bad, depending on the industry.

The only way you can determine if your turnover rate is healthy is through rigorous benchmarking against similar competitors (if such data is available) and measuring your own historical performance.

It’s up to each firm to establish its own unique turnover rate.

How To Analyse Your Employee Turnover Rate.

Once you’ve collated all your data from an internal survey, you then need to store it in a database, a trusty Excel spreadsheet, or your HRIS.

This is where things get a little technical, so you might want to enlist the support of a certified geek in your organisation.

Modern HRIS packages will do most of the heavy lifting for you. But if you’re still using Excel, here’s how to create a turnover rate management dashboard:

Once you’ve built the infrastructure, refreshing and monitoring the data is super simple.

How To Slash Your Employee Turnover Rate.

You’ve seen the quantitative data. Now, it’s time to gather some qualitative data.

You might suppose that people are leaving because they want a better annual salary, but if you sit down and chat with them, you might learn about other factors pushing them away.

Instead of asking, “How can I reduce employee turnover?” a better question would be “Why are employees leaving?”

It could be due to:

Only when you’re armed with the full facts can you deploy strategies to mitigate the issues.

It doesn’t matter how much money you throw at pizza parties or wellness rooms to boost employee morale. It will not reduce the underlying health and safety hazards on site.

Get the diagnosis right, and the treatment is much easier to administer – and more effective.

As for the engineers in the example above, they want a safe and clean working environment, so time and effort should be invested into upgrading the safety of their facilities.

That could mean:

Frequently Asked Questions About Employee Turnover.

Here are some of the frequently asked questions relating to calculating employee turnover rates.

What company has the highest turnover rates?

In Australia, mining and engineering firms account for eight of the ten employers with the worst turnover rate. As for the worst five companies and their respective industries, they are:

“Worst” is a strong word.

Some sectors have a huge shortage of skilled labour, which drives wages up. Some employers have no choice but to poach skilled labour from competitors with lucrative pay packages.

A low retention rate in mining overall could be indicative of dynamic labour market forces at play rather than poor working conditions.

How do you conduct an exit interview?

When going into an exit interview, you’ll need a method of recording the conversation. A recorded Zoom meeting is a much easier way of doing things than typing or writing in your notepad.

Your stance should be neutral. Some employees will use this as a forum to vent about their experiences, and you should let them deliver their truth and nothing but the unfiltered truth.

That’s why it’s important to respect what they say. Besides, you gain nothing by debating, questioning their experiences, or expressing your opinions.

Approaching this informally with a hot drink will engender feelings of mutual respect.

The employee is more likely to let their guard down if they feel comfortable freely expressing themselves as opposed to being interrogated.

Final Words On Calculating & Interpreting Turnover Information.

Calculating employee turnover rate is one thing, but it’s what you do with that information that can change the course of your business’s future.

You might conclude that your turnover rate doesn’t seem all that bad and forget about it, but until you measure employee turnover for a consistent period (at least three years), how can you possibly know if you have a healthy employee turnover rate?

You can look back at your company’s performance on your P&L statement and balance sheet, yet you have little visibility about your organisation’s biggest asset: people.

No matter how slick your processes are and how amazing your facilities are, employees are the lifeblood of your organisation.

If you aren’t measuring employee retention, your workplace has a huge blind spot.

Tommy